The Wall Street Journal’s choice of a headline for my op-ed last Friday “A Two-Track Plan to Restore Growth,” was a great way to pair the proposed fiscal reform with the proposed monetary reform. The Congress and the President would lay out the fiscal track to reduce the exploding debt and then nail down the track with the golden spike of entitlement reform. In parallel the Fed would lay out the monetary track to reduce its exploding balance sheet and then nail down the track with the golden spike of reporting and accountability reform. In each case reform is needed: for fiscal policy entitlement reform is needed to provide incentives to control spending growth and improve the quality of services; for monetary policy, reform is needed to provide incentives to follow more rules-based policies.

Hearings at the House Financial Services Committee last Wednesday covered many of these same issues in detail with new members of Congress asking good questions. Witnesses were Don Kohn (former vice chair of the Fed) and I who focused on monetary policy, as well as Bill Poole and Hal Scott who focused on fiscal policy and regulatory policy, respectively. There was also a good second panel with witnesses from the private business sector.

Somewhat surprisingly, Don Kohn agreed that reporting and accountability about monetary policy decisions could be improved, as I had argued in my testimony and in the op-ed, though he was not sure whether legislation was needed. In my view Congress should restore the Fed’s reporting requirements which it removed in the year 2000 in a little-known section of the American Homeownership and Economic Opportunity Act of 2000. Don emphasized that the congressional committees could ask better questions and thereby hold the Fed more accountable even without restoring the former type of requirement.

Two other related policy matters from last week:

Bob Heller (like Kohn and Poole, a former member of the FOMC) spoke out forcefully against recent Fed policies. According to Bloomberg News: “While most critics of the Federal Reserve are investors and market pundits, one noteworthy individual was a former member of the U.S. central bank. Robert Heller, Federal Reserve Governor from 1986-1989, described the Fed’s second round of quantitative easing, QE2, as ‘dangerous’ and ‘misguided’ in a Bloomberg interview.”

Ron Paul reintroduced a bill to repeal the law (31 USC 714(b)) which now prevents GAO from auditing certain monetary policy activities at the Fed. The Bill would delete the following language “Audits of the [Federal Reserve] Board and Federal Reserve banks may not include— (1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.” Other legislation related to the Fed is likely on the way.